Answer the question on the basis of the following consolidated balance sheet of the commercial banking system.Assume that the reserve requirement is 20 percent.All figures are in billions and each question should be answered independently of changes specified in all preceding ones. $\begin{array}{c}
\begin{array}{lll}
\quad\quad\quad\underline{\text { Assets}}\
\text { Reserves}\
\text { Securities}\
\text { Loans}\
\text { Property}
\end{array}
\begin{array}{l}
\
\$ 200 \
300 \
500 \
400
\end{array}
\begin{array}{lll}
\quad\quad \underline{\text { Liabilities \& Net Worth }}\
\text { Checkable Deposits}\
\text { Stock Shares}\
\
\
\end{array}
\begin{array}{lll}
\
\$1,000\
400\
\
\
\end{array}
\end{array}$

Refer to the given data.Suppose the Fed wants to reduce the money supply by $200 billion to drive up interest rates and dampen inflation.To accomplish this,it could increase the reserve requirement from 20 percent to:

Question

Answer the question on the basis of the following consolidated balance sheet of the commercial banking system.Assume that the reserve requirement is 20 percent.All figures are in billions and each question should be answered independently of changes specified in all preceding ones. $\begin{array}{c}
\begin{array}{lll}
\quad\quad\quad\underline{\text { Assets}}\
\text { Reserves}\
\text { Securities}\
\text { Loans}\
\text { Property} 
\end{array}
\begin{array}{l}
\
\$ 200 \
300 \
500 \
400 
\end{array}
\begin{array}{lll}
\quad\quad \underline{\text { Liabilities \& Net Worth }}\
\text { Checkable Deposits}\
\text {  Stock Shares}\
\
\
\end{array}
\begin{array}{lll}
\
\$1,000\
400\
\
\
\end{array}
\end{array}$

Refer to the given data.Suppose the Fed wants to reduce the money supply by $200 billion to drive up interest rates and dampen inflation.To accomplish this,it could increase the reserve requirement from 20 percent to:

Quizplus · Accepted Answer

Since the reserve requirement is currently 20 percent, the commercial banks are holding $\$200$ billion in reserves. This means they have created $\$800$ billion in checkable deposits, which is the money supply.
If the Fed wants to reduce the money supply by $\$200$ billion, it needs to increase the amount of reserves that commercial banks are required to hold. We can use the money multiplier formula to determine how much the reserve requirement needs to be increased:

$$	ext{Money multiplier} = \frac{1}{	ext{reserve requirement}}$$
$$\Delta 	ext{Reserves} = -\$200 	ext{ billion}$$
$$	ext{Required increase in reserve requirement} = \frac{\Delta 	ext{Reserves}}{	ext{checkable deposits}} = \frac{-\$200 	ext{ billion}}{\$800 	ext{ billion}} = -0.25$$

The negative sign indicates that the reserve requirement needs to be increased by a negative amount, meaning it needs to be increased from 20 percent. To find the new reserve requirement, we can solve for the reserve requirement using the money multiplier formula:

$$	ext{Money multiplier} = \frac{1}{	ext{reserve requirement} + \Delta 	ext{reserve requirement}}$$
$$\frac{1}{4} = \frac{1}{0.25 + \Delta 	ext{reserve requirement}}$$
$$\Delta 	ext{reserve requirement} = 0.05$$
$$	ext{New reserve requirement} = 0.2 + \Delta 	ext{reserve requirement} = 0.25$$

Therefore, the Fed should increase the reserve requirement to 25 percent.

Answer the Question on the Basis of the Following Consolidated